Uruguay Rate Rise ‘Strong Signal,’ Bergara, Lorenzo Say

March 30 (Bloomberg) -- Uruguay’s bigger-than-expected
interest rate increase last week was meant as a “strong
signal” that the government will do whatever it takes to
control inflation, the central bank president and economy
minister said.

Bank President Mario Bergara led policy makers on March 23
to boost the benchmark rate by one percentage point, to 7.5
percent, double the increase estimated by any of the four
economists surveyed by Bloomberg. Uruguay’s $40 billion economy
expanded 8.5 percent last year as surging demand for
agricultural exports, rising consumer spending and a jump in oil
and food prices pushed inflation to its fastest pace in two
years.

“The first strong signal we decided to give was in the
area of monetary policy,” said Bergara, 45, in his first media
interview since the policy meeting. “This decision was a sign
that the entire economic team, not just the central bank but
also the Economy Ministry, is focused on inflation.”

Uruguay joins other emerging-market countries, including
Brazil and Chile, in raising rates this month to prevent
economies from overheating. Inflation in the South American
nation that borders Argentina and Brazil quickened to 7.67
percent in February from 7.27 percent the previous month, above
the upper limit of the central bank’s 2011 target range of 4
percent to 6 percent.

After a bigger rate increase than economists expected,
“the market has to interpret that the authorities are ready to
take the necessary measures to contract a little, cool down the
economy a bit,” Bergara said in the interview at the Inter-American Development Bank annual meeting in Calgary.

More Unemployment

Bergara raised borrowing costs even as unemployment rose to
6.1 percent in January from a record low 5.4 percent in
December, according to the national statistics institute.

He said policy makers were concerned that private
consumption accelerated faster than economic growth last year.
That development, combined with external pressures such as oil
and food price rises, the Mideast crisis and the Japan
earthquake made inflation the “main risk for Uruguay’s
economy,” he said.

The government is also committed to controlling spending
growth in order to keep demand from overheating, said Economy
Minister Fernando Lorenzo, 51, who will host the IDB summit next
year in Montevideo, the nation´s capital. Government spending
last year trailed economic growth, rising 3 percent, he said.

The central bank move aimed “to reaffirm what has been a
fundamental anchor of the Uruguayan macroeconomic program, which
is a commitment to prudence and fiscal safety,” said Lorenzo.

Debt Ratings

Uruguay, a nation of 3.6 million, is rated Ba1, one level
below investment grade, with a stable outlook at Moody’s
Investors Service; BB+, one level below, with a stable outlook
at Standard & Poor’s; and BB, two levels below investment grade,
with a positive outlook by Fitch Ratings. The three companies
assigned investment-grade ratings to Uruguay in 1997 before
reducing them five years later after Argentina defaulted on $95
billion of debt.

Policy makers will focus on operations such as debt swaps
and repayments as it works to change its debt profile and reduce
the country’s vulnerability, Bergara said.

In 2005, Uruguay’s gross debt was equivalent to 100 percent
of gross domestic product. It was entirely denominated in
dollars, had an average expiration of two to three years and was
expensive, as it consisted mostly of emergency loans from
multilateral agencies such as the World Bank and the IMF,
Bergara said. Now debt amounts to less than 60 percent of GDP.
It’s 40 percent denominated in local currency, the average
expiration is above 12 years and it is much cheaper, as it comes
mostly from investors, he said.

Investor Appetite

While he’s not planning to issue bonds, since the country’s
financing needs are “very low,” Bergara sees appetite from
investors, especially for fixed-rate instruments denominated in
the peso.

Despite the country’s lack of an investment-grade rating,
“it is reasonable to say that we will certainly be one of the
next ones to get it,” Bergara said. “The market places us on
the same level as investment-grade countries, especially in
Latin America.”

Investors yesterday demanded an average 177 basis points in
extra yield to hold dollar-denominated Uruguayan bonds rather
than U.S. Treasuries, compared with 156 basis points for
Colombian debt and 173 basis points on Brazilian dollar bonds,
according to JPMorgan Chase & Co. indexes.

Dollar Bonds

The yield on Uruguay’s dollar bond due 2036 has declined 27
basis points to 6.09 percent from this year’s high of 6.36
percent on Feb. 15. The bond rose 0.15 cent to 119.54 cents on
the dollar as of 9:22 a.m. New York time, according to data
compiled by Bloomberg.

As part of the measures needed to prevent the economy from
overheating, the ministry will postpone to 2012 tax cuts
proposed in President Jose Mujica’s Frente Amplio party
government plan, Lorenzo said. The government pledged to cut the
rate of value-added tax to 20 percent from 22 percent.

“We were supposed to introduce a group of measures that
involved tax adjustments, and we now consider it adequate to
implement them in 2012,” Lorenzo said. “By then we believe the
economy will be back on a path compatible with its long-term
growth.”